ETFs grow in popularity as Covid presents opportunities

The exchange-traded fund (ETF) market is growing fast, as Covid-19 led to changes in industries and the habits of investors.

An ETF is a fund that invests in a wide range of assets, like stocks, bonds or metals, but trades on an exchange like a stock. It sometimes focuses on certain sectors.

While ETFs can be attractive, they can be an expensive way to get exposure to assets, and the costs of ownership can be difficult to assess.

Average daily transactions of ETFs last year was 3.8 trillion won ($3.41 billion), up 188 percent from a year earlier, according to data provided by the Korea Exchange last month.

ETF investments by retail, institutional and foreign investors all grew.

Last year, ETFs purchased by retail investors totaled 413 trillion won, up 225 percent from a year earlier, while those by institutional investors rose 62 percent during the same period to 173 trillion won. ETFs purchased by foreign investors skyrocketed 288 percent to 361 trillion won.

The number of traded ETFs rose 4 percent to 468 from 450 from December 2019 to the same month a year ago.

A notable change is that the total net asset value of ETFs that track indexes have shrunk to 42 percent last year from 55.7 percent a year earlier, while the total net asset value of ETFs that track specific sectors increased to 7.5 percent from 2.9 percent. That of ETFs that track overseas stocks increased to 8.1 percent from 4.5 percent.

Structural change

“Up until mid-last year, ETF transactions were centered on those that tracked indexes such as the Kospi, but Covid-19 has changed the investment trend,” said Kim Nam-ki, executive director from Mirae Asset Global Investments’ ETF management business unit. “Following the pandemic, ETFs that track specific sectors like BBIG [battery, bio, internet and game], rechargeable batteries and Chinese electric vehicles [EV] surfaced.”

At first, the market growth was centered on leveraged ETFs, as the stock market crashed since the pandemic outbreak early last year. But as the market gradually recovered, ETF transactions shifted to those that track specific sectors, like IT and bio.

Average daily transactions for Kodex Leverage in March was 1.6 trillion won. Six months later, the figure was down 47 percent to 846.3 billion won.

Kodex Leverage tracks the performance of the Kospi 200 index.

Sudden industry changes that followed the pandemic triggered the growth.

As people spent more time at home, online shopping and social network services boomed. The virus, at the same time, raised expectations for pharmaceutical companies in terms of the development of Covid-19 vaccines and treatments. It has also raise environmental consciousness, accelerating the shift to environmentally-friendly industries like rechargeable batteries for EVs.

“Before Covid-19, there weren’t major changes in the industrial structure — it was pretty much fixed,” Kim from Mirae Asset Global Investments added. “But Covid-19 has brought such a huge change and inspired asset management companies to introduce new types of ETFs that track new themes. New ETFs pulled in more retail investors.”

Growing competition

As demand jumped, competition to secure more investors has grown fiercer by asset management firms.

Currently, Samsung Asset Management and Mirae Asset Global Investments account for 77 percent of the total ETF market.

To break down the market share, rivals have begun offering ETFs with commissions lower than the usual commission rate of between 0.15 to 0.45 percent per year.

Earlier this month, KB Asset Management lowered the commission for KBSTAR 200 ETF, which tracks 200 companies listed on the Kospi, from 0.045 percent to 0.017 percent. It lowered the commission for other types of ETFs, with one of them charging 0.012 percent.

In October last year, Korea Investment Management introduced an ETF that tracks 100 companies from Nasdaq at a 0.09-percent commission. KB Asset Management and Mirae Asset Global Investments later introduced a similar product at a 0.07-percent commission.

“Offering low commissions for an ETF is a marketing strategy for a company to make its brand known,” said Hwang Seong-min, a spokesperson for Samsung Asset Management. “The intention is to collect low commission for less profitable ETFs to popularize its brand, and earn profit from other ETF products that collect higher commissions.”

BY JIN MIN-JI [jin.minji@joongang.co.kr]